Planning strategies to avoid intermediate sanctions.

EXECUTIVE SUMMARY

* Disqualified persons, such as officers, directors and trustees who exercise substantial influence over an exempt organization, are subject to a substantial excise tax when they receive an excess benefit from it.

* Excess benefit transactions include unreasonable compensation, asset purchases for more than FMV and other private inurement transactions.

* Tax advisers can help exempt organizations avoid excess benefit sanctions by reviewing compensatory arrangements and financial transactions with disqualified persons.

Tax advisers can help tax-exempt clients minimize the risk of triggering 5ec. 4958 sanctions on excess benefit transactions. This article identifies these transactions, explains the potential excise tax liability and discusses strategies for avoiding or reducing sanctions.

A substantial excise tax can be imposed under Sec. 4958 when officers, directors, trustees and other persons exercising influence over a tax-exempt entity receive an excess benefit from the organization. Detailed guidance on the grounds and liability for such sanctions is provided in regulations. (1) This article reviews the current rules on excess benefit transactions, the potential excise tax liability arising from these transactions and strategies for minimizing the risks of sanctions.

Background

Prior to the Taxpayer Bill of Rights 2 (TBOR2), revocation of exempt status was the only tool the IRS had to punish Sec. 501(c)(3) or (4) tax-exempt organizations that paid disqualified persons unreasonable compensation, or more than fair market value (FMV) for an economic benefit. When the IRS identified such situations--known as private inurement--it was faced with two extreme choices: (1) chastise the organization and ignore the indiscretion or (2) rescind the nonprofit's exempt status. (2) Thus, chief executive officers (CEOs), chief financial officers (CFOs), managers or board members who received such excess benefits potentially jeopardized the organization's exempt status.

Recognizing the potential inequity of punishing an entire organization for the transgressions of one or just a few persons, Congress struck a compromise in the TBOR2 by creating an excise tax in Sec. 4958 that could be imposed on offending persons of influence in nonprofit organizations. It also reduced the threat of excess benefit transactions triggering revocation of the organization's exempt status, unless such benefits are carelessly blatant. This legislation is often referred to as "intermediate sanctions," because the sanctions are a choice between inaction by the IRS and revocation of exempt status. It has considerable relevance for exempt entities concerned with proper governance, as well as for tax professionals with exempt clients. (3)

Intermediate Sanctions--Overview

Sec. 4958 and Regs. Sec. 53.4958 are the primary authority on intermediate sanctions. Guidance is also derived from cases, although most pertain to old (pre-1996) law. (4) In general, according to the Committee Reports, the Sec. 4958 excise penalty tax will be the only sanction imposed on an exempt transaction if the indiscretion is not so significant that it brings into question whether the organization is still charitable in its focus and mission. (5)

Excess Benefit Transactions

Sec. 4958(c)(1)(A) defines an excess benefit transaction as:

[A]ny transaction in which an economic benefit is provided by an applicable tax-exempt organization directly or indirectly to or for the use of any disqualified person, if the benefit's value exceeds the value of the consideration (including the performance of services) received for providing such benefit.

The three broad types of excess benefit transactions are (1) unreasonable compensation payments; (2) organizational purchases of assets from the disqualified person for more than their FMV; and (3) payments to a disqualified person that violate private inurement, such as certain revenue-sharing transactions. (6)

Disqualified Persons

Sec. 4958(f)(1)(A) defines disqualified persons generally as insiders (e.g., officers, employees, directors or trustees) who "exercise substantial influence" and control over an exempt organization. These persons are insiders who can potentially deal with the organization on a non-arm's-length basis because of their substantial influence, allowing them to reap "excess benefits" normally not possible for persons without such stature.

Under Regs. Sec. 53.4958-3(c), a person is deemed to exercise substantial influence if he or she is a (1) voting member of the governing body; (2) president, CEO or chief operating officer; (3) treasurer or CFO; or (4) person with material financial interests in a provider-sponsored organization. According to Kegs. Sec. 53.4958-3(e), the facts and circumstances may also suggest substantial influence if the person (1) founded the organization; (2) is a substantial contributor; (3) is compensated based primarily on organization revenues; (4) has or shares authority to control capital expenditures; (5) manages a discrete segment of the organization that represents a substantial portion of its activities, assets, income or expenses; (6) owns a controlling interest in the entity; or (7) is a nonstock organization controlled by disqualified persons.

Members of a disqualified person's family are also disqualified under Sec. 4958(f)(1)(B) and Regs. Sec. 49583(b). A person's family is limited to (1) a spouse, (2) brothers and sisters and their spouses, (3) ancestors, (4) children and their spouses and (5) grandchildren and great-grandchildren and their spouses. Finally, 35%-controlled entities of disqualified persons are also disqualified, under Sec. 4958(f)(1)(C). Further, anyone who has met any of these definitions at any time during the five years preceding the excess benefit transaction is disqualified.

Conversely, the following have no substantial influence: (1) Sec. 501(c) (3) organizations, (2) certain Sec. 501(c)(4) organizations or (3) employees who are not persons of influence listed above and are not highly compensated as described in Sec. 414(q) (providing an income threshold of $95,000 in 2005). (7)

Valuing Disqualified Person's Compensation

To determine whether excess benefits relate to a disqualified person, it is necessary to establish the compensation's FMV under Regs. Sec. 53.49584(b)(1)(ii). Traditional Sec. 162 standards apply, which typically involve compensation comparisons with persons who perform analogous functions for similar organizations. According to Regs. Sec. 53.4958-6(c)(2), compensation can be compared to current surveys compiled by independent firms and/or actual written offers from similar institutions for the disqualified person in question. If property transfers are involved, the property's FMV can be compared to current independent appraisals, as well as offers received as part of a competitive bidding process.

Insider compensation packages that involve a cap enhance the presumption of reasonableness, while authorization or approval by state or local legislative agencies or courts is not effective. (8) For example, an administrator of an exempt organization was deemed to receive private inurement because compensation was determined on a percentage basis, was not linked to business goals and had no ceiling. (9) Further, Regs. Sec. 53.4958-6(a)-(c) outline a rebuttable presumption that compensation arrangements with insiders are reasonable if the following three conditions are met:

1. The arrangement is approved in advance by an authorized body of the organization (e.g., a board of directors or trustees or a committee), as long as this group is staffed with individuals who do not have personal conflicts of interest (i.e., they will not personally benefit from a transaction or are not subordinates of the disqualified person in question);

2. The authorized body investigates the payment of persons who perform analogous functions in similar organizations; and

3. The authorized body documents the comparability of compensation levels with similar organizations.

According to/Legs. Sec. 53.49586(b), the IRS can rebut the presumption of reasonableness only if sufficient contrary evidence indicates that the information the authorized body used was not reliable. The Service has formulated "rebuttable presumption checklists" for both compensation and property as guides to meeting the requirements for establishing the regulations' rebuttable presumption. (10)

Organizations with average annual gross receipts under $1 million during the three prior tax years may use a special rule when reviewing compensation arrangements. Under/Legs. Sec. 53.4958-6(c)(2)(ii), "(t)he authorized body will be considered to have appropriate data as to comparability if it has data on compensation paid by three comparable organizations in the same or similar communities for similar services."

Compensation Subject to Excise Tax

Almost all forms of cash and noncash compensation (including benefits), whether taxable or not, are subject to the Sec. 4958 excise tax. For example, in Founding Church of Scientology, (11) unexplained loans, housing allowances and excessive rental payments by a church to its CEO's family for use of personal property caused private inurement, even though the organization paid a reasonable salary to the officer. In another situation,12 a taxpayer had excess benefit income from severance payments, undocumented loans, automobile use, property rents and insurance payments. However, under/Legs. Sec. 53.4958-4(a)(4), certain forms of compensation are disregarded for Sec. 4958 purposes, including (1) most nontaxable fringe benefits under Sec. 132, (2) accountable plan expense reimbursements and (3) benefits of $75 or less provided to organizational volunteers or board members.

Excise Tax Rates

Sec. 4958(a) and (b) impose excise penalty taxes on each excess benefit transaction involving an exempt organization and the disqualified person in question. Disqualified persons are potentially subject to two tiers of taxes and, generally, to a three-year statute of limitations under Sec. 6501, unless fraud is involved. Sec. 4958(a)(1) provides that an initial 25% tax applies to the total excess benefit. Further, the disqualified person is subject to an additional excise tax under Sec. 4958(b) of 200% of the excess benefit received if the transaction is not corrected within the tax period (see the discussion below). If the disqualified person pays less than the full correction amount, Regs. Sec. 53.4958-7 provides that the 200% tax will be levied only against the unpaid correction amount.

Disqualified persons are not the only ones who may be potentially liable for the Sec. 4958 excise tax, however. Under Sec. 4958(a)(2) and (f)(2), an organizational manager (such as an organizational officer, director or trustee, or anyone with similar power and authority) who knowingly participates in an excess benefit transaction, faces a 10% tax based on the excess benefit received over FMV. According to Regs. Sec. 53.4958-1(d)(7), this managerial excise tax cannot be greater than $10,000. Further, under Regs. Sec. 53.4958-1 (a), the manager may also be liable for the 25% tax if he or she also personally received an excess benefit.

Organizational managers may escape the 10% tax if they can show that their participation in the transaction was not willful and was due to reasonable cause. Willful participation is defined in Regs. Sec. 53.4958-1(d)(5) as voluntary, conscious and intentional. Under Regs. Sec. 53.4958-1(d)(6), participation is due to reasonable cause as long as the manager exercised ordinary business responsibility, care and prudence. Note: the terms knowingly and participate are critical to a manager's potential culpability. According to Regs. Sec. 53.4958-1(d)(4), managers participate in an excess benefit transaction knowingly only if they:

1. Have actual knowledge of the facts regarding the transaction;

2. Are aware that the transaction may violate the tax law; and

3. Fail to reasonably attempt to determine whether the transaction results in an excess benefit, or know that it is an excess benefit transaction.

Organizational managers are deemed to participate in an excess benefit transaction if they are actively involved in the transaction. However, under Regs. Sec. 53.4958-1(d)(3), managers may also be deemed to participate if they do nothing about the transaction or are silent when under a duty to speak or act based on their management function in the organization. However, managers who are opposed to the excess benefit transaction are not considered participants and should carefully document their opposition, via a memorandum to the board.

Transaction Correction

Disqualified persons may avoid the 200% second-tier excise tax if they ensure that the transaction is corrected. The timing of this correction is very important, because it must be affected in the tax period of the private inurement. Sec. 4958(0(5) defines the tax period as the time frame beginning with the date of the excess benefit and ending on the earlier of the (1) mailing of the deficiency notice or (2) date of the 25% tax assessment. Regs. Sec. 53.4958-7(a) defines correction as:

[U]ndoing the excess benefit to the extent possible, and taking any measures necessary to place the applicable tax-exempt organization involved in the excess benefit transaction in a financial position not worse than that in which it would be if the disqualified person were dealing under the highest fiduciary standards.

According to Regs. Sec. 53.4958-7(c), the correction amount equals the sum of the excess benefit, plus associated interest. Under Regs. Sec. 53.4958-7(b), the disqualified person corrects an excess benefit only by "making a payment in cash or cash equivalents, excluding payment by a promissory note." A disqualified person may also agree with the organization to "make a payment by returning specific property previously transferred in the excess benefit transaction."

Reporting Requirements

Disqualified persons and managers subject to the Sec. 4958 excise tax have to file Form 4720, Return of Certain Excise Taxes on Charities and Other Persons Under Chapters 41 and 42 of the Internal Revenue Code. (13) They may file Form 4720 along with the organization if they have the same tax year; they must file a separate Form 4720 if their tax year differs. Taxes on excess benefit transactions should be entered on Schedule I, Initial Taxes on Excess Benefit Transactions, and on Part II-A(h), Taxes on Self-Dealers, Disaqualified Persons, Foundation Managers and Organization Managers, of Form 4720. The return is due by the 15th day of the fifth month after the close of the disqualified person's or manager's tax year (May 15 for calendar-year taxpayers). If an organization can show that the private inurement is due to reasonable cause and not willful neglect, it can petition that the IRS to abate the associated excise taxes. (14)

Strategies to identify Risk and Avoid Intermediate Sanctions

Intermediate sanctions can cause tremendous economic upheaval for both the disqualified person and the exempt organization. Tax advisers should explain potential excise tax pitfalls to their exempt clients, and how intermediate sanctions may apply to the client's individual circumstances. This will increase the exempt entity's awareness of potential problem areas and underline the need to develop policies and procedures to minimize exposure to intermediate sanctions.

The Nonprofit Climate

To identify areas of potential risk associated with Sec. 4958, nonprofit managers and directors need an in-depth understanding of the nonprofit environment. Their ability to identify risk is strengthened as they gain a solid comprehension of the transactions and practices that may increase exposure to intermediate sanctions. This is particularly important for members of the board of directors, who may be very committed to the organization, but have little nonprofit expertise. For example, it is common for board members to be involved with a nonprofit because they are dedicated to its mission, are donors or have a link to the constituency the organization serves. Often, board members come from the private, or "for-profit" sector and, consequently, lack knowledge of some of the unique aspects of the nonprofit world.

Benchmarking Practices

An excellent way for tax advisers to help board members gain an understanding of the nonprofit environment is through benchmarking practices. Benchmarking can assist with developing documentation on potential excess benefit transactions. Benchmarking practices can be implemented using the following strategies.

Obtain data from similar nonprofit organizations: This involves locating similar nonprofit organizations comparable on several dimensions, such as size (i.e., revenues, budget, assets, member of employees, etc.), mission and location. Useful and relevant financial information on exempt entities can be found in Form 990, Return of Organizations Exempt From Income Tax, and in their audited financial statements. Financial information reported on Form 990 and supplemental data on exempt organizations, can be found easily at www.guidestar.org, The National Database of Nonprofit Organizations. This website is searchable based oi1 mission, size, etc. Additionally, an organization's Form 990 can be obtained from the IRS's website or directly from the entity. Many nonprofit organizations also post their annual reports (including audited financial statements) on their websites. Further, charity-monitoring or watchdog organizations, such as the Better Business Bureau (15) and American Institute of Philanthropy, (16) offer guidelines and disclose their review of financial practices of individual nonprofit organizations.

Review financial metrics of comparable organizations: Basic financial performance measures may not isolate a transaction that appears risky in terms of Sec. 4958; however, tax advisers can encourage nonprofit managers to gain a working knowledge of items to include on the nonprofit's financial "radar screen." By understanding the key performance measures nonprofit organizations use, nonprofit managers and directors can monitor the organization overall and become alerted to "red flags" or risky transactions. Examples of useful measures are shown in the exhibit at right. (17)

Exhibit: Nonprofit organization financial performance benchmarks

* Program expense ratio =
Total expenses spent on the organizational mission/
Total organizational expenses

In general, charity watchdog organizations suggest that this ratio
should be 60%-65% or higher, depending on the mission.

* General and administrative expense ratio =
Total general and administrative expenses/
Total expenses

In general, this ratio should be approximately 35% or less.

* Fund-raising expense ratio =
Total fund-raising expenses/
Contributions received from fund-raising efforts

This ratio should not exceed 35% (i.e., for each $100 earned through
fund-raising efforts, the organization should not spend more than
S35).

* Revenue growth = Percentage change in annual revenues

This indicator helps assess whether or not a nonprofit organization
maintains or grows the resources used to carry out its mission.
Performance ratios should be consistent or improve as revenue grows.

* Net asset level = Unrestricted net assets (or fund balances far
non-GMP organizations)

This amount should be less than or equal to three times the annual
budget. Organizations with unique types of assets or a large amount
of fixed assets not readily liquidated (such as land or property) may
have higher levels of net assets. The general reasoning behind this
measure is to ensure that an organization does not accumulate assets
that should be spent on its mission.

Review compensation and benefits paid by comparable organizations: Obtaining and documenting compensation levels of employees in similar organizations is paramount in avoiding excess benefit transactions. Salary information call be obtained from salary surveys targeted specifically at nonprofit organizations. In addition, Form 990, Schedule A, Organizations Exempt Under Section 501(c)(3), reports compensation, benefits and expense allowances for officers, directors, trustees and the five highest-paid employees in an organization. Many state nonprofit associations publish salary surveys that are particularly helpful for benchmarking salaries paid by organizations in similar geographic regions. (18)

Policy and Procedure Reviews

Exempt entities concerned with corporate governance, and tax professionals with exempt clients, need to be aware of risks that may trigger excess benefit transactions when reviewing policies and procedures. In particular, policies and procedures for compensation practices and transactions with parties exercising substantial influence over the organization should routinely be scrutinized; internal controls should be implemented when appropriate. For example, the organization should adopt a conflict-of-interest policy that prohibits actions that could trigger intermediate sanctions.

The policy should also suggest that benefits not treated as compensation are presumed to be excess benefits. Policies should also highlight the importance of substantiating in writing benefits paid to disqualified persons. For example, if a Sec. 501(c)(3) or (4) organization pays for personal expenses of a disqualified person (e.g., a vacation or personal use of a car), and does not substantiate that the benefit was paid as consideration for services, the payment may be an automatic excess benefit transaction. Even if the benefit was reasonable and had been taken into account, receipt without documentation (19) that it was for services can automatically subject the transaction to intermediate sanctions. (20) Because it is difficult to prove that a compensation package is unreasonable, the 11KS is now more likely to pursue whether a payment was explicitly substantiated in writing, a more objective determination, making these automatic excess benefit transactions an "easier target." (21)

Ideally, these policies should be part of disclosures under organizational governance, which is a subset of the organization's code of ethics. The latter should appear on its website and in pamphlets describing the organization to the public and should be augmented by a conflict-of-interest questionnaire that officers and directors must submit at least annually. These policies, as well as internal controls, should be reviewed annually; the results should be communicated to all managers and directors.

Compensation and Benefits Policies

Exempt organizations need to be very careful when structuring compensation contracts for individuals who could be disqualified persons. Potential areas of risk should be identified. It is crucial that the organization identify all disqualified persons as soon as possible.

Document comparable compensation: Comparable compensation data needs to be documented (see the above discussion on obtaining comparable information), and can consist of compensation paid to persons who perform analogous functions in similar organizations, adjusted for local and regional differences. The rebuttable presumption for reasonable compensation should also be invoked, meaning that an independent authorized body of the organization should approve in advance compensation for insiders based on a documented, rigorous assessment of comparables. "Small" exempt organizations with annual average gross receipts of less than $1 million during the last three years need to be aware of Regs. Sec. 53.4958-6(c)(2). For the authorized body of these smaller organizations, appropriate comparable compensation data is deemed to exist if it is secured from three comparable organizations in similar communities.

Review incentive and bonus pay, including contingent compensation and revenue-sharing contracts: The use of incentive compensation is becoming more popular, particularly as nonprofit organizations compete with the private sector for executive talent. It is critical to link incentive or bonus pay to specific identifiable goals (such as organizational performance), particularly for highly paid executive directors or officers. The board or a special compensation committee should review incentive plans and document how they support the organization's mission and improve performance. In addition, the committee should carefully review all existing compensation arrangements with disqualified persons.

Contingent compensation or revenue-sharing arrangements with potential disqualified persons can increase potential exposure to intermediate sanctions. These arrangements generally involve a person of influence receiving compensation based directly or indirectly on the organization's revenues. (22) For example, in one case, (23) private inurement resulted when a predetermined percentage of gross tithes were paid to an organization's ministers. In another, (24) private inurement resulted when a key scientist received 50% of an organization's profits as compensation. This was especially problematic, because the compensation was not connected to business

goals and there was no salary cap. Revenue-sharing arrangements, at a minimum, need a salary cap and a legitimate business purpose that attempts to reflect arm's-length dealing. However, according to several General Council Memoranda (GCMs), (25) certain revenue-sharing arrangements do not constitute private inurement, but tax advisers need to carefully investigate the details of these agreements. For example, revenue-sharing arrangements are relatively common between doctors and exempt hospitals; the IRS has deemed all physicians to be insiders. (26) However, Congress has provided that physicians only be deemed disqualified persons if they "exercise substantial influence" over the exempt organization. (27) Nonetheless, there may be legitimate circumstances in which a contingent-fee arrangement is the only way a nonprofit organization can obtain the services it needs to accomplish its mission.

This issue is significant and far from settled. For example, Regs. Sec. 53.49585 is reserved for transactions determined in whole or in part by the organization's revenues for future deliberation and guidance. Thus, it is presently unclear how the IRS will evaluate contingent-fee compensation, so these arrangements should be avoided, if possible. Tax advisers need to watch for these prospective directives, while carefully advising their clients presently.

Maximize use of benefit and reimbursement plans: Exempt organizations should consider maximizing the use of Sec. 132 fringe benefits for insider compensation arrangements, because they are generally not included in the definition of compensation subject to private inurement. Examples include (1) no-additional-cost services; (2) qualified employee discounts; (3) working condition fringe benefits; (4) de minimis fringe benefits; (5) qualified transportation benefits; and (6) qualified moving expense reimbursements. (28) Additionally, accountable reimbursement plans should be considered; such reimbursements are also excluded from private inurement.

Other Areas of Potential Exposure

Products or Services Offered by Disqualified Persons

An area frequently overlooked when considering how excess benefit transactions may occur is the use of business services provided by board members, trustees or related parties. For example, it is common for individuals working in the "for-profit" community to sell products or offer services to the nonprofit organizations for which they serve as board members. Often, the products or services are substantially discounted or donated to the organization, but, if not, a careful review of any consideration paid needs to be compared to the FMV of similar products or services received. When amounts are material and FMV is difficult to ascertain, it may be wise to obtain an appraisal before entering into the transaction. For example, the board members offering the products or services should provide a disclosure stating the nature of the relationship between themselves and the organization and how excess benefit issues have been considered and/or avoided. This should be reflected in the minutes of board of director meetings.

Compensation Paid to Board Members

Charity-monitoring or watchdog organizations frown on compensation paid to members of the organization's board of directors. Compensation and reimbursements paid to directors or trustees must be disclosed on Form 990; however, it is wise to avoid the compensation issue altogether as to board members. If an exempt organization decides to compensate board members, it should find a similar organization that pays its board compensation and document the comparison. It is a potential "red flag" for donors when an organization pays directors and they are not volunteers.

Conclusion

Exempt organizations should review all compensatory arrangements and financial transactions with potentially disqualified persons to determine areas of exposure to private inurement. An awareness of how nonprofits operate, planning, benchmarking, documentation and policy and procedure review, are all critical in minimizing risks associated with intermediate sanctions.

(1) TD 8978 (1/22/02).

(2) For example, in Church of the Transfiguring Spirit, Inc., 76 TC 1 (1981), a church paid virtually all its income to its ministers as housing allowances; as a result, it lost its exempt status. In Carl B. Carter, TC Memo 1958-166, an organization lost its exempt status when its founders commingled their own income with the organization's revenues and paid personal expenditures from its funds. In Help the Children, Inc., 28 TC 1128 (1957), an organization lost exempt status when it paid contributions to doctors to entice them to work at a city-operated free clinic.

(3) See Michael T. Caracci, 118 TC 379 (2002), for an example of intermediate sanctions. In that case, family members and three S corporations they owned were assessed Sec. 4958 excise taxes because the transfer of assets from three exempt home healthcare organizations to the three S corporations was not quid pro quo. The FMV of the transferred assets was much larger than the consideration paid in the exchange, giving rise to taxable excess benefits. Assessment of intermediate sanctions was appropriate to penalize the tax indiscretions, but the court ruled that the excess benefits were not sufficient to question the three organizations' exempt nature as a whole.

(4) See id. and note 2, supra.

(5) See H Rep't No. 104-506, 104th Cong., 2d Sess. (1996), p. 59, n. 15.

(6) See Sec. 4958(c)(1) and Regs. Sec. 53.4958-4 and -5.

(7) IR-2004-127 (10/20/04); see Regs. Sec. 53.4958-3(a)-(e). Facts and circumstances may show that a person does not have a substantial influence over the organization if (1) the person has taken a bona fide vow of poverty; (2) the person is a contractor (such as an attorney or accountant) whose sole relationship with the exempt entity is providing advice; (3) the individual's direct supervisor is not a disqualified person; (4) the person is not involved in significant management decisions; or (5) preferential treatment provided is the same for all donors.

(8) See Regs. Sec. 53.4958-6(b).

(9) Gemological Institute of America, 17 TC 1604 (1952).

(10) See, Brauer, Tyson, Henzke and Kawecki, "An Introduction to I.R.C. 4958 (Intermediate Sanctions)," Exempt Organizations Continuing Professional Educational Technical Instruction Program for FY 2002 (IRS, October 2001), App. 2, "Compensation," and App. 3, "Property," pp. 327-333; Miller, "Rebuttable Presumption Procedure is Key to Easy Intermediate Sanctions Compliance," Tax Information for Charities and Other Non-Profits, located at www.irs.ustreas.gov/charities/index; and Miller, "Easier Compliance is Goal of New Intermediate Sanction Regulations," 14 Tax Notes Today 148 (1/22/01).

(11) Founding Church of Scientology, 412 F2d 1197 (Ct. C1. 1969).

(12) IRS Letter Ruling (TAM) 200243057 (7/2/02).

(13) See Regs. Sec. 53.6071-1 and Notice 96-46, 1996-2 CB 212.

(14) See Kegs. Secs. 53.4958-1(d)(1) and (6) and 301.6724-1(b), (c) and (d), pertaining to an exempt organization's failure to report an economic benefit as compensation.

(15) See the Better Business Bureau's website, at www.bbb.org.

(16) See the American Institute of Philanthropy's website, at www.charitywatch.com.

(17) The measures are consistent with guidelines suggested by charity-monitoring organizations; see BBB Wise Giving Alliance Standards for Charitable Accountability, at www.give.org; American Institute of Philanthropy, note 16 supra, and Charities Review Council, at www.crcmn.org.

(18) The National Council of Nonprofit Associations provides links to many state sponsored salary surveys, at ww.ncna.org.

(19) Contemporaneous substantiation by the organization can include Form W-2, 1099 or 990 and includes Form 1040 for the recipient. Other documentation is also acceptable, such as employment contracts. These forms of written substantiation are covered in detail in Regs. Sec. 53.4958-4(c)(3).

(20) See Kalick, "The IRS Focuses on Automatic Excess Benefit Transactions and Compensation," 16 Tax'n of Automatic Exempts 3 (July/August 2004).

(21) Id., at p. 4; and Brauer and Henzke, Jr., "Automatic Excess Benefit Transactions Under IRC 4958," Exempt Organizations Continuing Professional Educational Technical Instruction Program for FY 2004 (ILLS, 2003).

(22) See note 5 supra, at p. 56.

(23) People of God Community, 75 TC 127 (1980).

(24) Gemological Institute of America, note 9 supra.

(25) See, e.g., GCMs 38283 (2/15/80), 38905 (10/6/82) and 39674 (6/17/87).

(26) Ann. 92-83, IRB 1992-22, 59.

(27) See Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 104th Congress (JCS-12-6, 12/18/96).

(28) See Sec. 132(a)-(g).

Sandra B. Richtermeyer, Ph.D., CPA, CMA

Associate Professor of Accounting

Department of Accountancy

Williams College of Business

Xavier University

Cincinnati, OH

Gary Fleischman, Ph.D., CPA, CMA

Associate Professor of Accounting

College of Business

Univeristy of Wyoming

Laramie, WY